Pricing Spectrum holds key to recovery

Buyers will bite with the right price, Bill argues in his blog, Ear to the Ground

January 15, 2009



Where should we look for signs any future stimulus plan is working?

A press release from Lexington, S.C., caught my eye recently. It noted an increase in pre-sold, custom-built homes and theorized it was driven by lower building materials costs. Personally, I doubt lower materials costs would trigger the decision to build a custom home, unless the client had faith his new home would hold the value built into it. At any rate, the release quoted local custom builder Steve Baudo of Baudo & Associates Home Builders, saying, “I have experienced more demand for large, high-end custom homes in the last three months than in the past two years combined.”

Baudo reported the company focuses on homes $400,000 and up but notes most sales have been in the $1 million-plus range. “We are...gearing up to meet the demand as our pipeline continues to fill up,” Baudo says.

The reason this caught my eye is that it jibes with the scuttlebutt I'm hearing where I live in Sarasota, Fla., from some of the local Realtors who have been telling me that existing waterfront homes are beginning to move again — at discounted prices — to wealthy snowbirds pouncing on bargains with cash.

For some time, I've held the opinion that new home sales in just about every market will come back from the far edges of the pricing spectrum long before anything starts to happen in the fat center of that spectrum. The pricing middle is where the bulk of the inventory is — both new and existing homes. But if you can't afford the midpoint price or your interest is above $1 million, you're not going to be as inclined to wait for a clear sign that prices have bottomed — which is what most potential home buyers are doing.

Entry-level buyers will jump back into the market when they are able; a government stimulus program with down-payment assistance and below-market rates on 30-year, fixed-rate FHA mortgages would move them back into the market. Young families are still forming and eager to own. New home builders can get a share of that business with better prices, better locations and products targeted specifically to this market segment, demographically and psychographically. When you talk about pent-up demand,entry buyers are who come to my mind.

However, the custom market will have its own share of pent-up demand. Many of the people in the market for a new home in the $1 million and up range have been sitting on the sidelines for two or three years as well. And a lot of them don't want to buy somebody else's dream home. They want their own. Sure, the stock market is down and a lot of businesses are in trouble. That cuts into the demand for custom homes. But it doesn't eliminate it. Wealthy baby boomers who have been promising their spouses a new dream home for five years are getting antsy.

That's why I believe home sales will recover from the edges of the pricing spectrum, and that's where you shouldlook for signs of recovery in your market. Maybe some buyers are already there. Maybe a federal stimulus program, later this winter, will unleash them.

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